Strong SFR Fundamentals Drive Tricon’s Q3 2022 Results

By Business Wire News On Nov 9, 2022

TORONTO–(BUSINESS WIRE)–Tricon Residential Inc. (NYSE: TCN, TSX: TCN) (“Tricon” or the “Company”), an owner and operator of single-family rental homes and multi-family rental apartments in the United States and Canada, announced today its consolidated financial results for the three and nine months ended September 30, 2022.

All financial information is presented in U.S. dollars unless otherwise indicated.

The Company reported strong operational and financial results in the third quarter, including the following highlights:

Net income from continuing operations increased by 3% year-over-year to $178.8 million compared to $174.3 million in Q3 2021; basic and diluted earnings per share from continuing operations were $0.65 and $0.49, respectively;
Core FFO of $46.4 million increased by 21.7% year-over-year and Core FFO per share of $0.15 increased by 7.1%, reflecting growth in the single-family rental home business and strong operating performance, partially offset by an 18% increase in weighted average diluted shares outstanding stemming largely from Tricon’s U.S. public offering in October 2021;¹
Same home Net Operating Income (“NOI”) for the single-family rental portfolio in Q3 grew by 10.2% year-over-year and same home NOI margin increased by 1.5% to a record 68.5%. Same home occupancy increased by 0.3% year-over-year to 97.9%, same home turnover remained at a low rate of 18.6% and blended rent growth was 8.4% (comprised of new lease rent growth of 16.3% and renewal rent growth of 6.6%);
The single-family rental portfolio expanded by 5.5% during the quarter (29.7% year-over-year) through the organic acquisition of 1,988 homes at an average price of $352,000 per home (including closing and up-front renovation costs) for a total acquisition cost of $700 million, of which Tricon’s proportionate share was $213 million;
Positive trends continued into the fourth quarter, with same home rent growth of 7.6% in October 2022, including 13.0% growth on new leases and 6.8% growth on renewals, while same home occupancy was stable at 98.2% and same home turnover remained low at 16.4%. Given significantly higher financing costs, Tricon has elected to reduce its pace of acquisitions further and expects to acquire approximately 850 homes in Q4 and 7,300 homes for the full year;
On October 18, 2022, the Company completed the sale of its remaining 20% equity interest in its U.S. multi-family rental portfolio, generating approximately $315 million of gross proceeds, including approximately $100 million of performance fees;
On October 13, 2022, the Company announced that the Toronto Stock Exchange (“TSX”) had approved its notice of intention to make a normal course issuer bid to repurchase up to 2,500,000 of its common shares trading on the TSX, the New York Stock Exchange and/or alternative Canadian trading systems during the twelve-month period ending on October 17, 2023; and
On October 20, 2022, the Company announced an industry-leading Bill of Rights for residents, the first of its kind among single-family rental housing providers in the United States. This measure underscores Tricon’s resident-first approach and highlights the Company’s mission to support the well-being of Tricon residents. The Tricon Resident Bill of Rights outlines the Company’s commitment to providing quality, move-in-ready homes with caring and reliable service.

“Tricon delivered another strong quarter of results, underscoring the resilience of the single-family rental business in a much higher rate environment where it’s never been more compelling to rent versus own a home,” said Gary Berman, President and CEO of Tricon. “The fundamentals of our SFR business are rock solid and that was on display again in the quarter with total proportionate and same home NOI increasing by 26.0% and 10.2%, respectively. Notwithstanding our conviction in the business fundamentals, we have made the decision to slow SFR acquisitions given the dislocation in the debt capital markets and meaningfully higher borrowing costs. We intend to reduce our acquisition volume from nearly 2,000 homes in Q3 to 850 homes in Q4 2022 and conserve capital for better investment opportunities ahead. The sale of our 20% interest in our U.S. multi-family portfolio has given us additional liquidity to accelerate acquisitions when the capital markets stabilize, and in the interim, to buy back stock while also simplifying our operations. I want to commend our team for the superb execution of this sale transaction in a very choppy market. Our success as a public company has been built around our ability to tackle challenging environments and proactively manage business cycles – we remain confident that today’s uncertainty will ultimately give way to rewarding opportunities for those with the patience and capital to wait.”

Financial Highlights

For the periods ended September 30	Three months					Nine months
(in thousands of U.S. dollars, except per share amounts which are in U.S. dollars, unless otherwise indicated)		2022			2021		2022		2021

*Financial highlights on a consolidated basis*
Net income from continuing operations, including:	$	178,786		$	174,347	$	723,491	$	348,918
Fair value gain on rental properties		107,166			362,285		802,573		728,899

Basic earnings per share attributable to shareholders of Tricon from continuing operations		0.65			0.80		2.63		1.70
Diluted earnings per share attributable to shareholders of Tricon from continuing operations		0.49			0.80		1.87		1.69

Net (loss) income from discontinued operations		(2,335	)		27,539		33,277		(26,368	)
Basic (loss) earnings per share attributable to shareholders of Tricon from discontinued operations		(0.01	)		0.13		0.12		(0.13	)
Diluted (loss) earnings per share attributable to shareholders of Tricon from discontinued operations		(0.01	)		0.12		0.11		(0.13	)

Dividends per share⁽¹⁾	$	0.058		$	0.055	$	0.174	$	0.167

Weighted average shares outstanding – basic		274,710,065			215,546,550		274,474,675		203,272,703
Weighted average shares outstanding – diluted		311,910,445			217,768,873		312,023,897		205,305,513

For the periods ended September 30	Three months				Nine months
(in thousands of U.S. dollars, except per share amounts which are in U.S. dollars, unless otherwise indicated)		2022		2021		2022		2021

*Non-IFRS⁽²⁾measures on a proportionate basis*
Core funds from operations (“Core FFO”)	$	46,403	$	38,143	$	140,447	$	106,391
Adjusted funds from operations (“AFFO”)		35,182		31,003		109,570		85,046

Core FFO per share⁽³⁾		0.15		0.14		0.45		0.42
AFFO per share⁽³⁾		0.11		0.12		0.35		0.33

(1) Dividends are issued and paid in U.S. dollars. Prior to November 8, 2021, dividends were declared and paid in Canadian dollars; for reporting purposes, amounts recorded in equity were translated to U.S. dollars using the daily exchange rate on the applicable dividend record date. (2) Non-IFRS measures are presented to illustrate alternative relevant measures to assess the Company’s performance. For the basis of presentation of the Company’s Non-IFRS measures and reconciliations, refer to the “Non-IFRS Measures” section and Appendix A. For definitions of the Company’s Non-IFRS measures, refer to Section 6 of Tricon’s MD&A. (3) Core FFO per share and AFFO per share are calculated using the total number of weighted average potential dilutive shares outstanding, including the assumed exchange of preferred units issued by Tricon PIPE LLC, which were 311,910,445 and 312,023,897 for the three and nine months ended September 30, 2022 and 264,874,216, and 255,505,229 for the three and nine months ended September 30, 2021, respectively.

Net income from continuing operations in the third quarter of 2022 was $178.8 million compared to $174.3 million in the third quarter of 2021, and included:

Revenue from single-family rental properties of $170.8 million compared to $115.1 million in the third quarter of 2021, largely as a result of a 29.7% expansion in the single-family rental portfolio to 35,262 homes and an 11.4% year-over-year increase in average effective monthly rent (from $1,539 to $1,714).
Direct operating expenses of $54.5 million compared to $39.4 million in the third quarter of 2021, driven primarily by the increase in size of the rental portfolio, higher property tax expenses associated with increasing property values, as well as general cost and labor market inflationary pressures.
Revenue from private funds and advisory services of $112.5 million, which increased significantly from $11.0 million in the third quarter of 2021, primarily driven by the accrual of performance fees earned from the sale of Tricon’s remaining 20% equity interests in the U.S. multi-family rental portfolio following quarter-end.
Fair value gain on rental properties of $107.2 million compared to $362.3 million in the third quarter of 2021, owing to a year-over-year appreciation of home values within the single-family rental portfolio, albeit at a decelerated rate given the current climate of rising mortgage rates and greater economic uncertainty.

Net income from continuing operations for the nine months ended September 30, 2022 was $723.5 million compared to $348.9 million for the period ended September 30, 2021, and included:

Revenue from single-family rental properties of $464.7 million and direct operating expenses of $150.7 million compared to $321.5 million and $108.9 million in the prior year, respectively, which translated to a net operating income (“NOI”) increase of $101.4 million, attributable to the expansion of the single-family rental portfolio as well as strong rent growth.
Revenue from private funds and advisory services of $145.3 million compared to $33.0 million in the prior year, for the reason discussed above.
Fair value gain on rental properties of $802.6 million compared to $728.9 million in the prior year as a result of very strong home price appreciation experienced in the first half of the year.

Core funds from operations (“Core FFO”) for the third quarter of 2022 was $46.4 million, an increase of $8.3 million or 22% compared to $38.1 million in the third quarter of 2021. This increase in Core FFO reflects NOI growth from the single-family rental business, as discussed above, but excludes performance fees from the sale of the U.S. multi-family rental portfolio as the cash was received subsequent to quarter-end. Core FFO increased by $34.1 million or 32% to $140.4 million for the nine months ended September 30, 2022 compared to $106.4 million in the prior period. This increase in Core FFO reflects NOI growth from the single-family rental business and higher income earned by the Company’s Private Funds and Advisory business emanating from new Investment Vehicles, including the property management fees generated by the U.S. multi-family rental portfolio (which, along with asset management fees, will no longer be earned following the divestiture of Tricon’s interest in the portfolio and its exit from the U.S. multi-family rental business).

Adjusted funds from operations (“AFFO”) for the three and nine months ended September 30, 2022 was $35.2 million and $109.6 million, respectively, an increase of $4.2 million (13%) and $24.5 million (29%) from the same periods in the prior year. This growth in AFFO was driven by the increase in Core FFO discussed above, partially offset by higher recurring capital expenditures associated with a larger single-family rental portfolio and inflationary cost pressures for both materials and labor.

Single-Family Rental Operating Highlights

The measures presented in the table below and throughout this press release are on a proportionate basis, reflecting only the portion attributable to Tricon’s shareholders based on the Company’s ownership percentage of the underlying entities and excludes the percentage associated with non-controlling and limited partners’ interests, unless otherwise stated. A list of these measures, together with a description of the information each measure reflects and the reasons why management believes the measure to be useful or relevant in evaluating the underlying performance of the Company’s businesses, is set out in Section 6 of Tricon’s MD&A.

For the periods ended September 30	Three months						Nine months
(in thousands of U.S. dollars, except percentages and homes)		2022			2021			2022			2021

Total rental homes managed								35,545			27,248
Total proportionate net operating income (NOI)⁽¹⁾	$	71,321		$	56,617		$	201,799		$	162,301
Total proportionate net operating income (NOI) growth⁽¹⁾		26.0	%		12.8	%		24.3	%		10.4	%
Same home net operating income (NOI) margin⁽¹⁾		68.5	%		67.0	%		68.2	%		67.1	%
Same home net operating income (NOI) growth⁽¹⁾		10.2	%		N/A			10.7	%		N/A
Same home occupancy		97.9	%		97.6	%		98.1	%		97.5	%
Same home annualized turnover		18.6	%		20.8	%		16.2	%		22.2	%
Same home average quarterly rent growth – renewal		6.6	%		5.0	%		6.5	%		4.6	%
Same home average quarterly rent growth – new move-in		16.3	%		20.5	%		17.9	%		16.5	%
Same home average quarterly rent growth – blended		8.4	%		9.3	%		8.4	%		8.0	%
(1) Non-IFRS measures are presented to illustrate alternative relevant measures to assess the Company’s performance. For the basis of presentation of the Company’s Non-IFRS measures and reconciliations, refer to the “Non-IFRS Measures” section and Appendix A. For definitions of the Company’s Non-IFRS measures, refer to Section 6 of Tricon’s MD&A.

Single-family rental NOI was $71.3 million for the three months ended September 30, 2022, an increase of $14.7 million or 26.0% compared to the same period in 2021. The higher NOI was primarily driven by a $17.8 million or 21.8% increase in rental revenues attributable to an 11.4% increase in the average monthly rent ($1,714 in Q3 2022 vs. $1,539 in Q3 2021) and 9.7% portfolio growth (Tricon’s proportionate share of rental homes was 21,372 in Q3 2022 compared to 19,477 in Q3 2021). Other revenue also increased by $1.2 million or 30.6% as a result of incremental ancillary revenues earned on services provided to residents such as smart-home technology and renters insurance. This favorable change in revenue was partially offset by a $4.4 million or 14.9% increase in direct operating expenses as a result of incremental costs associated with a larger portfolio of homes, higher property taxes attributable to home price appreciation and increased property management costs reflecting a tighter labor market.

Single-family rental same home NOI growth was 10.2% in the third quarter of 2022, primarily reflecting revenue growth of 7.8%, as a result of a 7.9% increase in average monthly rent ($1,656 in Q3 2022 compared to $1,535 in Q3 2021), along with a 30 basis point increase in occupancy to 97.9%. This favorable growth in revenue was partially offset by a 2.9% increase in operating expenses reflecting higher property taxes and property management expenses, offset primarily by lower turnover, repairs and maintenance expenses.

Single-Family Rental Investment Activity

The Company expanded its single-family rental portfolio by acquiring 1,988 homes during the quarter, bringing its total managed portfolio to 35,262 rental homes. The homes were purchased at an average cost per home of $352,000, including up-front renovations, for a total acquisition cost of $700 million, of which Tricon’s share was approximately $213 million.

Adjacent Residential Businesses Highlights

Quarterly highlights of the Company’s adjacent residential businesses include:

On October 18, 2022, the Company completed the sale of its remaining 20% equity interest in its U.S. multi-family rental portfolio for gross proceeds of approximately $315 million, including approximately $100 million of performance fees (half of which are payable to participants in the Company’s Long-Term Incentive Plan and management co-investment plans). The Company used the net proceeds of approximately $260 million primarily to repay outstanding debt on its corporate credit facility and strengthen its balance sheet flexibility to pursue future growth opportunities in its core single-family rental business;
In the Canadian multi-family business, The Selby continues to achieve strong leasing activity, with the property reaching record occupancy of 98.6% and blended rent growth of 23.0% (reflecting a combination of higher market rents and the removal of substantial leasing concessions prevalent during the COVID-19 pandemic), resulting in year-over-year NOI growth of 71.1%;
Tricon’s investments in U.S. residential developments generated $7.3 million of distributions to the Company in Q3 2022, including $1.3 million in performance fees;
In Tricon’s Canadian residential development portfolio, the Symington project is on track to commence construction in Q1 2023. Construction at The Ivy and Canary Landing (West Don Lands) – Block 8 continue to progress, with first occupancy anticipated by early to mid-2023. Although the portfolio experienced pressures on construction timelines and costs associated with the current inflationary environment, the Company leveraged its strong trade relationships to minimize construction delays and reduce the impact of cost increases;
Subsequent to quarter-end, The Taylor welcomed its first residents to the 36-story, 286-unit mixed-use rental community at the heart of Toronto’s entertainment district. Leasing demand has been robust, with 23% of the building already pre-leased at average rental rates of C$4.33 per square foot per month; and
On October 27, 2022, the Company refinanced The Shops of Summerhill mortgage by entering into a new facility with a total commitment of $16.0 million (C$21.8 million) and a term to maturity of three years. The loan carries a fixed interest rate of 5.58% and is secured by The Shops of Summerhill property. The Company used the loan proceeds to pay off the existing facility and repatriated $5.1 million (C$6.8 million) of excess proceeds.

Change in Net Assets

As at September 30, 2022, Tricon’s net assets grew by $145.5 million to $3.8 billion compared to $3.6 billion as at June 30, 2022. The increase was primarily driven by reported net income of $175.6 million for the quarter (including fair value gains of $107.2 million on the single-family rental properties or $72.7 million on a proportionate basis). As a result, Tricon’s book value (net assets) per common share outstanding increased by 4% sequentially or 30% year-over-year to $13.74 (C$18.83) as at September 30, 2022.

Balance Sheet and Liquidity

Tricon’s liquidity consists of a $500 million corporate credit facility with approximately $318 million of undrawn capacity as at September 30, 2022. The Company also had approximately $142 million of unrestricted cash on hand, resulting in total liquidity of $460 million. With the sale of Tricon’s interest in the U.S. multi-family rental portfolio, liquidity increased to $717 million subsequent to quarter-end. The Company has approximately $3 billion available to invest in future opportunities when including third-party unfunded equity commitments.

As at September 30, 2022, Tricon’s pro-rata net debt (excluding exchangeable instruments) was $2.9 billion, reflecting a pro-rata net debt to assets ratio of 36.7%. For the three months ended September 30, 2022, Tricon’s pro-rata net debt to Adjusted EBITDAre ratio was 8.3x.²

On October 7, 2022, SFR JV-2 entered into a new term loan facility with a total commitment of $500 million, a term to maturity of three years and two one-year extension options, subject to lender approval. The loan carries a floating interest rate of one-month Secured Overnight Financing Rate (“SOFR”) plus 2.10% (subject to a SOFR cap of 4.55%) and is secured initially by a pool of 1,962 single-family rental properties. The initial loan proceeds were primarily used to pay down existing short-term SFR JV-2 debt and to fund the acquisition of rental homes.

2022 Guidance Update

As a result of the strong operating results during the third quarter, the Company updated its guidance for the Core FFO per share and same home metrics for the current fiscal year. The Company also updated its acquisitions guidance reflecting a shift in near-term capital allocation towards debt reduction, liquidity preservation and share repurchases in light of rapidly increasing debt financing costs for single-family home acquisitions, and an expectation that better investment opportunities will emerge in the future.

For the year ended December 31	Current 2022 Guidance			Previous 2022 Guidance			Update Drivers

Core FFO per share	$ 0.75	–	$ 0.77	$ 0.60	–	$ 0.64	Inclusion of net performance fee earned from U.S. multi-family sale

Same home revenue growth	8.0%	–	9.0%	8.0%	–	9.5%	Tightening of prior guidance range

Same home expense growth	4.5%	–	5.5%	7.0%	–	8.5%	Lower than expected repairs, maintenance and turnover expenses

Same home NOI growth	10.0%	–	11.0%	8.5%	–	10.0%	Driven by lower than expected expenses as noted above

Single-family rental home acquisitions	~7,300			~8,000			Slowing pace of acquisitions to preserve capital for more attractive opportunities in the future

Note: Non-IFRS measures are presented to illustrate alternative relevant measures to assess the Company’s performance. Refer to the “Non-IFRS Measures” section and Section 6 of the Company’s MD&A for definitions. See also the “Forward-Looking Information” section, as the figures presented above are considered to be “financial outlook” for purposes of applicable securities laws and may not be appropriate for purposes other than to understand management’s current expectations relating to the future of the Company. The reader is cautioned that this information is forward-looking and actual results may vary materially from those reported. Although the Company believes that its anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information. The Company reviews its key assumptions regularly and may change its outlook on a going-forward basis if necessary.

Quarterly Dividend

On November 8, 2022, the Board of Directors of the Company declared a dividend of $0.058 per common share in U.S. dollars payable on or after January 15, 2023 to shareholders of record on December 31, 2022.

Tricon’s dividends are designated as eligible dividends for Canadian tax purposes in accordance with subsection 89(14) of the Income Tax Act (Canada), and any applicable corresponding provincial and territorial legislation. Tricon has a Dividend Reinvestment Plan (“DRIP”) which allows eligible shareholders of the Company to reinvest their cash dividends in additional common shares of the Company. Common shares issued pursuant to the DRIP in connection with the announced dividend will be issued from treasury at a 1% discount from the market price, as defined in the DRIP. Participation in the DRIP is optional and shareholders who do not participate in the plan will continue to receive cash dividends. A complete copy of the DRIP is available in the Investors section of Tricon’s website at www.triconresidential.com.

Conference Call and Webcast

Management will host a conference call at 11 a.m. ET on Wednesday, November 9, 2022 to discuss the Company’s results.

Contacts

Wissam Francis

EVP & Chief Financial Officer

Wojtek Nowak

Managing Director, Capital Markets

Email: investorsupport@triconresidential.com

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